Update on the Revised Iowa Limited Liability Act

Transcription

1 Update on the Revised Iowa Limited Liability Act Joseph Leo Telephone: Facsimile: BrownWinick 666 Grand Avenue, Suite 2000 Des Moines, IA www:brownwinick.com

2 Transition: Old Act to New Act New LLC Act applicable to all LLCs as of January 1, The old LLC Act still applies to all LLCs formed before January 1, 2009, unless the LLC elects to be governed by the new LLC Act.

3 Transition (cont.) Any LLC formed after January 1, 2009 automatically is governed by the new LLC Act. This is important because there are certain differences in the default provisions in the old LLC Act and the new LLC Act.

4 Differences Between New and Old Main difference is in the default provisions of the acts. Default provisions are frequently altered by contract called the Operating Agreement. New Act puts more emphasis on Operating Agreement.

5 Distinctive LLC Characteristics Limited Liability for Members Flexible Management Flexible Profit Allocations No Restrictions on Type of Owner Ability to Match Entity to the Deal

6 Formation of an Iowa LLC Determination of Name Availability File Certificate of Organization Prepare Operating Agreement Organizational Minutes EIN Application (Company SSN)

7 Name of Iowa LLC Name of the LLC must be distinguishable from any other company in Iowa. Must contain the words limited liability company, limited company, or the abbreviations LLC, LC. Requirements included in Section of Iowa Code.

8 Name of Iowa LLC (cont.) Can reserve names for LLCs (Section ). Fill out an application on the SOS website and pay $10 filing fee.

9 Certificate of Organization To organize an LLC under the New LLC Act, you must file a Certificate of Organization. Different than Old LLC Act, which required Articles of Organization. Certificate of Organization requires less information than the Articles of Organization under the Old LLC Act.

10 Certificate of Organization (cont.) Filing the Certificate of Organization only requires: The name of the LLC. The name and address of the initial registered office and registered agent of the company. Certificate of Organization can include other information about the LLC that is not specifically required.

11 Next Step, Operating Agreement After filing the Certificate of Organization, the LLC should adopt an operating agreement. Governs the internal affairs of the LLC and will be discussed in greater detail later. Operating Agreement more important under New LLC Act versus Old LLC Act.

12 Organizational Minutes Minutes address such issues as: Who are the members of the LLC. Who are the managers of the LLC. Who are the officers of the LLC. Where will the LLC have a bank account. Much like housekeeping items for the LLC.

13 General Considerations Operating Agreement Contractual in Nature Tailored to Reflect Agreement Between Members. Governs Relationship Between Members as Members and Members and Managers.

14 General Considerations Operating Agreement (cont.) The New Act generally provides default rules which may be modified by the Operating Agreement. The Operating Agreement is binding on the members, but not third parties.

15 Allocation of Profits and Losses One of the most important factors in an LLC is how are the profits and losses allocated between the members of the LLC. This should be one of the first considerations discussed when an LLC is formed with more than one member.

16 Allocation of Profits and Losses (cont.) The default provision under the LLC Act is that each member of the LLC shares equally in the profits and losses of the LLC. Many LLCs alter this general rule through an operating agreement. There are many ways that LLCs can allocate profits and losses.

17 Methods of Allocating Profits and Losses Based on the amount of capital contributed by the members. Based on the amount of labor provided by each of the members. Some combination of both. Always consider how members who join later will be treated.

18 Quantifying Profit and Loss Allocation Typically quantified in Units. Voting is also typically allocated in the same manner. Can also be done based on percentage of ownership.

19 Management Two options: Member Managed Manager Managed

20 Management Default Rules New Act defaults to member management. Each member may bind the LLC. If conflict about matters in the ordinary course, majority rule. Unanimous consent required for other matters, like amendments, mergers, etc.

21 Management Manager- Managed LLCs LLC is manager-managed if Operating Agreement says it is manager-managed or uses words of similar import. New Act provides default rules for manager-managed LLCs.

22 Management Manager- Managed Default Rules Each manager has equal rights to manage. If conflict regarding matters in the ordinary course, majority rule. Consent of members still required to amend operating agreement, merge, activities outside the ordinary course. Managers elected by majority of the members (not membership units).

23 Management Common Provisions Reduce threshold for approving mergers, amendments to the operating agreement (2/3 common). Permitting certain members to elect a certain number of managers. Requiring approval of certain members or managers to take certain actions.

24 Management Common Provisions (cont.) Requiring member approval for transactions over certain thresholds. Creating classes of units with different economic or voting rights. Election of managers by majority of units instead of majority of members.

25 Transfer Restrictions/Out Provisions Most smaller companies include some type of restrictions on who can become a member of the LLC. The LLC Act has more permissive rules for transfers than most operating agreements.

26 Transfer Restrictions (cont.) Many LLCs want to restrict the number of members. Transfer restrictions are important when you have a key owner. Tax reasons to restrict transfers for larger LLCs.

27 Transfer Restrictions (cont.) LLC should consider whether they will allow transfers in certain situations: When a member dies. Transfers of the units as a gift. Transfers of units from one member to another member. Transfers of units that do not really change the ownership of the units (such as from an individual to a trust that the individual controls).

28 What is a Transfer Also important to consider, what is the definition of transfer? Operating Agreement provides the definition. Pledge of the units as collateral? Change in form of ownership? Gifts of the units?

29 Options for Transfer Restrictions Rights of first refusal. No transfers until a certain date in the future with a small window to transfer. No transfers period. Only transfers back to the LLC based on some set price. Some combination of all.

30 Deadlock Always must consider what happens when there is a deadlock. Most important when there are two equal owners. Need to provide a method to break the tie in the operating agreement. Less of a problem in larger LLCs.

31 Put/Call Option Another option is a put-call option. Works where there are very few members. Allows one member to offer that the member will purchase all of the other outstanding units in the company for some certain price or the member is willing to sell all of the member s units at the same price. Benefits the larger units-holders.

32 Fiduciary Duties Three fiduciary duties: Duty of Care Duty of Loyalty Duty of Good Faith and Fair Dealing Similar to duties of board of directors and officers of a corporation.

33 Duty of Care Requires member/manager to act with the care that a person in a like position would reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the company. Subject to the Business Judgment Rule.

34 Business Judgment Rule Provides that the duty of care is met if: The manager is not interested in the transaction (no self-dealing). The manager informs him or herself in a manner that the manager reasonably believes appropriate in the circumstances. The manager has a rational basis to believe the action is in the best interests of the company.

35 Duty of Loyalty Includes the following duties: Not to compete. Not to steal corporate opportunities. Not to self-deal.

36 Duty of Loyalty (cont.) Self-dealing transactions can be approved by the members upon full disclosure of all material facts regarding the transaction.

37 Duty of Good Faith and Fair Dealing Fuzzy standard that requires honesty and fairness. Generally overlaps the other duties.

38 Modification of Duties The above duties, except duty of good faith and fair dealing, may be modified or defined by the operating agreement as long as not manifestly unreasonable.

39 Common Modification of Duties Limit and define the scope of the duty not to compete. Limit the corporate opportunity doctrine. Allow approval of self-dealing transactions by independent managers. Modify or define the duty of care, often limiting to intentional misconduct or violation of law.

40 Indemnification Limitation of Liability The Operating Agreement may waive liability and indemnify managers for any actions except: Breach of the duty of loyalty. Intentional infliction of harm on the company. Improper financial benefits. Intentional violation of criminal law. Liability for improper distributions.

41 Website: Toll Free Phone Number: OFFICE LOCATIONS: 666 Grand Avenue, Suite 2000 Des Moines, Iowa Telephone: (515) Facsimile: (515) Franklin Place Pella, Iowa Telephone: (641) Facsimile: (641)